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Competition, markups, and predictable returns

Journal

Review of Financial Studies

Subject

Finance

Publishing details

Review of Financial Studies 2020 Vol 33:12 p 5906-5939

Authors / Editors

Corhay A;Kung H;Schmid L

Biographies

Howard Kung

Publication Year

2020

Abstract

This paper jointly examines the link between competition and expected returns in the time series and in the cross-section. To this end, we build a general equilibrium model where markups vary because of firm entry with oligopolistic competition. When concentration is high, markups are more sensitive to entry risk. We find that higher markups are associated with higher expected returns over time and across industries, in line with the data. The model can also quantitatively account for the persistent rise in aggregate risk premiums and macroeconomic volatility associated with the secular increase trend industry concentration since the mid-1980s.

Available on ECCH

No


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